Explanation

The carry arbitrage model states that:

$$\text{Forward Price} = \text{Spot Price} \times (1 + r)^T + \text{Carry Costs} - \text{Carry Benefits}$$

Where:

• r = risk-free rate (financing cost)
• T = time to expiration
• Carry costs = storage, insurance, etc.
• Carry benefits = dividends, convenience yield, etc.

Analysis of each option:

A: Carry costs increase - INCORRECT

• When carry costs increase, forward prices should increase, not decrease
• Higher storage/insurance costs make holding the asset more expensive

B: Carry benefits increase - CORRECT

• When carry benefits increase (e.g., higher dividends), forward prices decrease
• Higher benefits make holding the asset more attractive, reducing the forward price

C: Financing costs increase - INCORRECT

• When financing costs (risk-free rate) increase, forward prices should increase
• Higher opportunity cost of capital increases the forward price

Therefore, the correct answer is B - forward contract prices decrease when carry benefits increase.